Standard & Poor's Rating Services (S&P) has announced a refinement of its methodology and assumptions for rating structured settlement payment securitizations. The revised criteria, effective December 2, 2009 for all new and outstanding structured settlement securitizations, incorporate:
- New corporate default targets and supplemental stress tests to access insurance carrier default targets; and
- Supplemental stress tests to access insurance carrier default risk in structured settlement transactions.
S&P's new criteria for structured settlement securitizations appear in an S&P article titled "Update to Methodology And Assumptions And New Supplemental Tests for U.S. Structured Settlement Payment Securitizations".
S&P's revised ratings for structured settlement securitizations will:
- Use the latest version of when analyzing structured settlement securitizations. The CDO Evaluator is S&P's analytical tool for estimating the defaults and losses of collateralized debt obligation (CDO) transactions at different rating levels.
- Typically apply:
- the largest-obligor default test to tranches at all rating levels to access a given tranche's ability to withstand specified combinations of insurance company defaults, assuming an immediate flat rate of 50%;
- the largest-industry default test or the alternative-industry default test, which ever is applicable, to tranches at the 'AAA', 'AA+', 'AA', and 'AA-' rating levels, assuming an immediate flat recovery of 60%.
- Use the results of the two supplemental tests without running cash flows to assess whether the tranche in question is likely to have sufficient credit enhancement to absorb the losses at each rating level.
To achieve an S&P rating, a structured settlement transaction tranche:
- must have sufficient credit enhancement to withstand the level of defaults the CDO Evaluator generates in relation to the asset portfolio under the associated cash flow stresses, and
- must also pass the two supplemental tests applicable at the given rating level.
This is the first post for a new S2KM series about structured
settlement securitizations. For additional information about the
secondary structured settlement market, see:
- Wikipedia's entry for "structured settlement factoring transaction"
- S2KM's reports about the NASP 2009 Annual Meeting
- "Structured Settlements and Periodic Payment Judgments" - Release 47.